State must look at tax reform

By Doug Henton

Special to The Bee

January 29, 2015 04:00 PM

UPDATED January 30, 2015 12:00 AM

As we consider what comes next after Proposition 30, the temporary tax increase measure that begins to expire in 2016, it is time to have a robust debate about our tax structure and how it impacts innovation, opportunity and prosperity in California.

California’s $2 trillion economy has shifted from being mainly agricultural and manufacturing during the 1950s and 1960s, when the framework of today’s tax system was set, to one based on information and services, which now account for 80 percent of all economic activity in the state.

We need a tax system based on this real economy, while ensuring that new revenue is invested in ways that strengthen opportunity.

A linchpin of that new philosophy could be Senate Bill 8, the Upward Mobility Act proposed by Sen. Bob Hertzberg. It would broaden the tax base by imposing a tax on services, exempting health care and education; alter the corporate tax structure to provide incentives for business investment; and reduce personal income taxes across the board while retaining its progressive structure.

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In 1990, while at SRI International, I co-authored a report for the state of Florida that outlined several criteria for determining the economic impact of tax reform. The study found that Florida’s tax structure was inadequate for moving into the 21st century. Recurrent fiscal crises throughout the 1970s and ’80s were symptoms of fundamental problems. The state relied too heavily on sales taxes dependent on the boom-and-bust cycles in the dominant tourism and services industries.

The report found that Florida needed fundamental reform. To compete in the new economy, the study called for a tax system with pro-competitive principles that supported innovation, including efficiency and diversity. We used these criteria to evaluate several proposed reforms, and recommended extending sales taxes to services and instituting a single corporate business tax that would broaden the tax base while eliminating deductions and lowering rates.

With this kind of tax reform, the public sector would have greater stability and revenue growth to invest in education and infrastructure to support a growing population, while the private sector would have greater incentive to invest in people, research and equipment essential for an innovation economy.

Florida failed to fully enact these reforms, so it was not prepared for the real estate collapse. Along with California, it suffered during the Great Recession with some of the highest budget deficits and unemployment in the nation.

We don’t need to follow Florida’s tax policies. However, California could learn to evaluate our tax reforms using pro-competitive principles to promote innovation, opportunity and prosperity.

Doug Henton is CEO of Collaborative Economics, a consultancy based in San Mateo.